China Slowdown: RSTV - The Big Picture

Anchor – Frank Rausan Pereira

Guest – Jayant Dasgupta, Former Ambassador of India at WTO; Ajay Shankar, Former Secretary, DIPP; Raviprasad Narayanan, Associate Professor, Centre for East Asian Studies, JNU; Ajay Dua, Former Secretary, Ministry of Commerce & Industry.

Why in the news?

• China’s premier recently warned that the country faces a “tough struggle” as he unveiled tax cuts and other measures to prop up an economy expected to slow further this year (2019).
• Premier Li Keqiang told the opening session of China’s annual National People’s Congress that the government is targeting growth of 6.0 to 6.5 percent this year for the world’s second-largest economy, lowering its range from 2018.
• The slowdown and trade war have become major challenges for President Xi Jinping, one year after the NPC boosted his status as the country’s most powerful leader since Mao Zedong by abolishing term limits and etching his name into China’s constitution.
• The government had set a target of around 6.5 per cent in 2018 and eventually recorded official growth of 6.6 percent — the slowest pace in nearly three decades.
• Three-quarters of provinces have already lowered their annual growth targets this year.
• This edition of the Big Picture will analyse the Chinese slowdown and what it means for the world.

Analysis by the Experts:

Let’s first try and understand what does the slowdown for the Chinese economy mean and how would you look at the Chinese slowdown?

Ajay Dua, Former Secretary, Ministry of Commerce & Industry, weighed in with his arguments here.

• I am not as perturbed as a lot of people around the world are. 6.5% on a base of 12 trillion dollars is a lot of growth for the economy. The Chinese have had a very long period of sustained double digit growth and this is something which had peaked in the year 2008 to around 14% rate of growth. Now China is becoming (what we call in economic terms), a mature economy.
• In a mature economy, after a while, when all the low hanging fruits have been picked up, there would naturally be a slowdown which the Chinese have been experiencing from 2018 onwards. The fact of the matter today is that the Chinese currently have a 20% share of the global economy; China also has huge exports; China continues to grow, and the Chinese have a very low inflation.
• The Chinese continue to have prosperity and across the board a much more rapid alleviation of poverty than we have seen anywhere in the world. Although there is a certain bearish sentiment that exists currently, but it has been exaggerated in the context of the trade war which is going on between the two largest economies of the world, namely, the U.S. and China.

What is causing this present slowdown in China? Why isn’t China registering double digit growth?

Jayant Dasgupta, Former Ambassador of India at WTO, weighed in with his arguments here.

• There are quite a few factors which underlie this slowdown.
• A mature economy can’t keep on growing on a large base at double digit rates.
• Also, China reaped huge dividends from its single child policy and from having more and more people join the workforce.
• Thus, in terms of the workforce compared to the total population, it kept getting better and better till 2012, when it peaked and then again, the productive workforce compared to the total population has declined, which means that because of the aging population, less percentage of people are involved in working.
• The second issue was about the efficient allocation of resources. The third issue was that China for almost 3 decades, showed a 17% growth in exports, which contributed hugely.
• Also, China invested heavily in infrastructure, which kept its economy booming and also helped tremendously in its export effort. This is now slowing down because there are limits to how much one can spend on infrastructure, plus another factor to consider is that there is a huge debt overhang currently. The debt overhang is about 300% of the GDP of China. This was mentioned by Premier Li Keqiang in the annual policy report as well.
• Thus, China has chosen to provide $238 USD Billion of tax cuts to stimulate the economy.
• Spending needs to be pushed up in order to stimulate the economy and to push up the growth rate.
• However, if China has a very loose money policy, then it will be a problem. Thus, China has to do a tight-rope walk. China has to cut down on taxes, but at the same time, keeping some stimulus in the economy so that growth does not come down very sharply.

How will the measures taken by the Government like the cutting of taxes and so on and so forth- how would this help the situation?

Ajay Shankar, Former Secretary, DIPP, weighed in with his arguments here.

• When we look at the Chinese Premier’s statement, we find that he recognizes and is preparing the people of China for a period of slower growth.  
• He highlighted the need for quality development.
• His current problem is managing domestic expectations of very high growth.
• This task would be made harder as China is now a mature economy.
• There are other important factors as well: For example the western markets are now not growing as fast as they were earlier to absorb Chinese exports and there are trade frictions with the U.S.
• Thus, China has to get used to a far lower rate of growth. However, what needs to be borne in mind is that the Chinese have been very smart and very focussed in trying to get into leadership positions in all the sunrise industries and technologies.
• Thus, they are the global leaders in electric cars; they are the global leaders in solar power; they are also leaders now in nuclear power. They are working on robotics and they are working on artificial intelligence. Thus, they are very systematically preparing themselves for a global leadership role of the kind that the U.S. has had over the last century. Thus, the Chinese are preparing themselves for the current modest slowdown which may go down further.
• In case of the stimulus that the Chinese have done, they have taken the step keeping in mind domestic expectations. China has, in fact, continued to indulge in a domestic stimulus on the spending side for some time now- this has led to some excess capacity creation in housing, in real estate, and in infrastructure. Now, China is hoping to do tax cuts and again get some kind of a stimulus, but they have realized now that they have to settle down for lower rates of growth and try and attain technological leadership across the spectrum.

How are the people in China going to look at this? Are they ready for an economic slowdown?

Raviprasad Narayanan, Associate Professor, Centre for East Asian Studies, JNU, weighed in with his arguments.

• Let’s look at it this way. In China, much as it is in most Asian countries, one cannot separate the economy from politics. All politics are domestic, and let’s look at China’s current economic growth rates as being part of a domestic process of consolidation.
• These rates of growth which have come down are expected in the sense that it has been expected for quite some time, and they would last at least for a decade plus and this should be considered as the new normal.
• Also, China’s internal debt is worrying. It is close to 300% of the GDP, although the Economist says it is around 250% of the GDP. This means that China is going the way of Japan.
• Japan also has a domestic debt which is 2.5 times more than the size of the GDP. Thus, this may be the new aspect of East-Asian economic growth. The other aspect is politics. Politics in China cannot be separated from the Economy. This is because all land in China is owned by the State. And, the people in China who have benefitted the most are the princelings in the party- they hardly pay any taxes on the rents that have been generated through their connections. The other aspect is that only 1% of the Chinese actually pay income tax honestly. This is very worrying because it shows grave dislocations of the financial systems within China.  
• The other aspect is that we all assume that Xi Jinping is fully in control of everything in China; however, there are divided opinions on this claim. There are factions within the party who loathe to having Xi Jinping accumulating so much power and weaving his name into their constitution. This is where certain challenges crop up for Xi Jinping. As a matter of fact, he is willy nilly trying his best to hold on to power, which he will for the foreseeable future. However, there is no second generation person within the party who can pose a challenge. Externally, China has been ambitious, spreading billions and billions of dollars- with initiatives such as the Maritime Silk Road, etc. These are plans with a lot of financial outgo without any expected returns in the future.

You spoke about how the economic slowdown in China is over exaggerated at this point in time because of the sheer size of the Chinese economy. However, what kind of impact is this going to have on the world economy?

Ajay Dua, Former Secretary, Ministry of Commerce & Industry, weighed in with his arguments here.

• I believe that the Chinese authorities have acted very maturely in so far as signalling that there will be a slowing down of growth. The Chinese Premier spoke about rationalizing the Value Added Tax (VAT). Thus, Government revenue would effectively be cut down to an extent in order to stimulate certain sectors of the economy, which were experiencing a slowdown.  
• Further, the Chinese are not thinking of lowering the interest rates very much; this is because the Chinese would not like to see too much of money in the economy which could lead to inflation. Further, inflation always has the potential of causing social unrest if it goes out of control.
• Another major development which the Chinese Premier announced was the opening up of the country to FDI. The entire global financial market has responded to this development very positively. Further, there will be a little softening of commodity prices, because the extent of commodity prices (what China was importing), whether it was copper, coal, hydrocarbons, depended upon what the consumption level in China was.

How much of an impact has the trade war with the US had on the Chinese economy?

Jayant Dasgupta, Former Ambassador of India at WTO, weighed in with his arguments here.

• • The trade wars have had a very perceptible dampening effect on the Chinese economy. Apart from the Chinese exporters who were exporting directly to the USA, it has also affected the supply chain.
  • Also, there were certain items in which China had overcapacity, and it was dependent on the western countries.
  • There are reports for instance in certain industries like Steel, where there have been layoffs.

• This also has created some social unrest in certain provincial towns of China.

• Thus, the Chinese economy has been affected and if this continues beyond the 1st of April 2019, then it will of course have a much deeper impact.

Will we see a revival of the Chinese economy in the near future?

Ajay Shankar, Former Secretary, DIPP, weighed in with his arguments here.

• This would be very unlikely. I believe that China has entered a phase which Japan entered in the 1980’s, i.e. a period of modest growth. Even Japan had difficulties in so far as handling their internal debt problems. Even Japan had a comparable demographic decline- which is what China is experiencing now.
• Thus, China has begun to age and will age rapidly. Therefore, the problems that China will experience in the coming decades would be similar to what Japan has experienced in the last 2-3 decades. The only difference between Japan and China is that this relative stagnation is occurring at a very high income, but an income per-capita which is considerably lower than that of Japan.

How big a problem is the economy for President Xi Jinping domestically?

Raviprasad Narayanan, Associate Professor, Centre for East Asian Studies, JNU, weighed in with his arguments.

• Domestically, any economic decline in China affects the communist party of China when it comes to its internal legitimacy. Why is this so? It is because the Communist Party of China should be seen as an umbrella organization with a lot of factions. There are several factions which are opposed to Xi Jinping for several reasons. Firstly, that he does not have a background from the PLA. The retired PLA officials form one of the important factions who are lobbying against Xi Jinping and his absolute appropriation of power at every level.
• Secondly, we also have certain groups in Shanghai who are coalescing around to oppose Xi Jinping. Currently, Xi Jinping is in absolute power in every realm.
• The economic growth rate of China is going to be half of what it used to be in the past. Those days of double digit growth are gone.
• It is important to note that in 1962, China had a severe economic crisis internally.
• In 1979, when the war happened with Vietnam, the reforms in China had just been inaugurated and it was not being welcomed by the people who felt that things were moving too fast, and hence they would be cut out.  This is when the party, in an effort to re-establish its superiority and also the sovereignty of China decided to send the PLA outwards.

Concluding Remarks:

• From an Indian perspective, there was an opportunity of our Indian exports becoming more competitive, because of the labour shortage in China. India continues to have a huge deficit with China. However, if normal trade with the U.S. assumes, then we will not be affected too much.
• The Chinese economy owes a lot to the 17% growth it enjoyed for almost three decades in exports. Now, the world economy is growing at only about 3.5%, thus, the Chinese exports are going to slow down as well and China is going to vacate the space of labour-intensive industries like garments for instance. This would provide India with an opportunity. Also, with other similar labour-intensive sectors, we would have an opening.
• Lastly, the slowing down of China presents India with a good opportunity, however, it is up to India to make the most out of that opportunity, by getting our internal factors right to be competitive in global manufacturing. However, this unfortunately is still a work in progress.
• This is a time when China is going to refocus its energies, in expanding its technological presence in the world through the new means it has attained. China is preparing for the technological revolution, beyond the industrial revolution of the past.

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